Authority, Control, and the Distribution of Earnings

TLDR

Firm size, span of control, and managerial incomes arise jointly from market assignments of personnel to hierarchical positions. Assigning highly talented individuals to top roles boosts productivity beyond their own abilities, as talent cascades through the firm via a recursive chain‑of‑command mechanism. The multiplicative talent effects lead to disproportionately large rewards for top managers in large firms, causing reward and firm‑size distributions to be skewed relative to ability.

Abstract

The distributions of firm size, span of control, and managerial incomes are modeled as the joint outcome of market assignments of personnel to hierarchical positions. Assigning persons of superior talent to top positions increases productivity by more than the increments of their abilities because greater talent filters through the entire firm by a recursive chain of command technology. These multiplicative effects support enormous rewards for top level management in large organizations. Also, superior managers control more than proportionately larger firms. Consequently, the distributions of reward and firm size are skewed relative to the distribution of abilities.